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Merger Arbitrage Analysis And Spread Performance - March 8, 2020

Mar. 09, 2020 9:05 AM ETMNA, PEGI, RRGB5 Comments


  • Red Robin Gourmet Burgers suffers as coronavirus fears hit eat-in restaurant.
  • Pattern Energy Group moves higher on better than expected results.
  • Average all-cash merger arbitrage spreads widen significantly for the second week in a row.

This article explains the reasons behind the movement in a selection of the largest U.S. cash merger arbitrage spreads from the past week as calculated by Merger Arbitrage Limited. We analyze the attractiveness and profitability of each spread going forward and indicate the trading position or action we have taken or intend to take based upon the analysis given.

Red Robin Gourmet Burgers (RRGB)

Red Robin suffered the worst decline in its history (for the second week running) last week as the markets began to price in the effect the coronavirus will have on eat-in restaurants. Things started bad, in-line with the broader market, but as the week progressed the spread of the virus in the U.S. caused investors to bail from the sector en mass. Thursday saw the largest decline which spilled over into Friday. By the end of the week, RRGB had closed down $9.00 at $18.50 against an offer price of $40 from Vintage Capital. A fall of 32.73% leaves the simple spread at a whopping 116.22%.

The speed and pace of change of the market in this environment makes it difficult to remain current in terms of offering investment analysis. As can be expected, we have taken a severe loss on our RRGB position although the P&L is somewhat mitigated via the employment of our active arbitrage strategy. By a strange irony, it is possible RRGB management, in combination with the coronavirus may have pushed the firm into such a position that Vintage Capital may choose to walk away under these circumstances. A situation pleasing to management but disastrous for the arbs. If Vintage remain committed to doing a deal, and should the macro environment continue as it is, it is highly likely the offer will be revised lower. Should the wider economic scene return to "normal", sooner rather than later (a situation we highly doubt), Vintage

This article was written by

Merger Arbitrage Limited is a successful Event Driven & Special Situations Investment fund. Along with the website Merger Arbitrage Limited the fund specializes in Merger Arbitrage (Risk Arbitrage). The investment process focusses on the following key elements i) Evaluation of relative risk/return characteristics ii) Time frame analysis iii) Entry/exit points This focus has resulted in multiple variants of the traditional merger arbitrage strategy each having their own unique characteristics. In concert, these strategies produce an attractive source of alternative beta with less risk than traditional plain vanilla merger arbitrage thus producing an attractive sharp ratio consistently above 2. The key areas listed above have been intensely researched and build extensively upon existing academic literature resulting in a series of proprietary algorithms. The primary geographic area of operation is (but not restricted to) the US and encompasses all deal types.

Analyst’s Disclosure: I am/we are long RRGB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

HaroldRamis profile picture
what is heavens name is 'active arbitrage'
Merger Arbitrage Limited profile picture
An actively managed merger arbitrage strategy variant frequently referred to in this column.
Tom Sandlow profile picture
Any thoughts on TGE?
wondering the same
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